Are we in for a recession?
Currently talk of recession remains all the rage, and more people seem to be worried about this occurring.
A recession is formally defined as two consecutive quarters of negative GDP growth, and Australia has not had a recession since 1990-1991s. But recently the negative nellies are out trying to scare us a recession is imminent in Australia.
I don’t think that’s the case, and in previous episode of our regular Property Insiders chats, Dr. Andrew Wilson has also shared that view.
To some degree we’ve had an income and inflation recession for the last few years, which has led the media to concentrate on the negatives.
But, there are some good things happening around Australia. Before we take a look at those, it’s important to understand the following:
Economists have a poor track record of predicting recessions
Recessions tend to occur when there is a shock to the system - usually due to high interest rates putting a brake on the spending and investment.
And they tend to occur after periods of excess such as after a property or stock market boom or periods of rapid growth in spending, debt or inflation.
However, some economic commentators seem to be permanently negative and predict a recession almost every year.
Some of the arguments these pessimists are bringing up at present include:
1. The latest GDP figures show our economy is weak
Annual GDP growth has fallen to 1.4 per cent, and the media loves telling us that that’s the slowest pace since the GFC.
Others mention this figure is below population growth of 1.6 per cent and talk of a “per capita recession” reminding us that consumer spending remains very weak and we are being propped up by public spending and net exports.
However, the economy is likely to pick up now and annualising the latest quarterly result still gives us a reasonable GDP result of around 2 per cent growth. So we’re in second gear - not reverse.
2. Unemployment is likely to rise, and wages growth is slow
The weak construction and retail sectors are likely to shed employment in the medium term future.
3. Dwelling approvals for high rise construction are down by 60% from their peak in 2016
The residential construction sector has been a major employer but now construction is in a slump and this is unlikely to improve in the short term.
Recent concerns around building quality and cladding have created a stigma on new high rise apartment towers decreasing buyer demand. At the same time funding for new developments face major headwinds.
4. A retail recession
Large parts of the retail sector are facing near recession conditions due to cautious consumer spending, weak wages growth and challenges associated with online purchasing.
And with poor wages growth likely for some time yet, these conditions are likely to persist.
5. All the turmoil in the world economy
US trade wars, tensions in the Middle East and Brexit are all concerns.
However, while these global uncertainties are likely to constrain business investment growth, a recession seems unlikely.
But let’s not forget all the good things that are happening
1. Our interest rate cuts and tax cuts should boost spending. They haven’t so far, but there is scope for further rate cuts (though very limited now) as well as other monetary policies;
2. Strong population growth will continue to support the Australian economy;
3. The property market is picking up and this will boost consumer confidence;
4. Infrastructure spending is booming;
5. The low $A is supporting the economy by aiding Australian businesses that compete internationally;
6. Australia is in current account surplus;
7. There will be a budget surplus in 2019/20 (probably around 0.5% of GDP) and debt to GDP ratio at the Federal level is low so there is plenty of room for fiscal stimulus; and
8. Business investment is improving.
All this means that if Australia does slip into a “technical” recession it will be very different to previous recessions – it’s unlikely will have significant unemployment and the resulting pain that creates.
The bottom line?
Australian economy is likely to remain weak over the next few years. Wages growth and consumer spending is likely to remain weak and unemployment is likely to rise over the next few years.
Sure our economy is going through a rough patch but a recession seems unlikely in the near future.
Michael Yardney is a director of Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy.
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